DAILY MORNING NOTE | 27 October 2023

Singapore shares fell 0.2 per cent amid declines in other regional markets on Thursday (Oct 26). Across the broader market, gainers beat losers 294 to 285 after 1.29 billion securities worth S$1.04 billion changed hands. Genting Singapore was the biggest gainer, rising 2.3 per cent or S$0.02 to S$0.875. Frasers Logistics and Commercial Trust was at the bottom of the table. It shed 2.9 per cent or S$0.03 to S$1. The trio of banks were mixed. OCBC ended the day up 0.1 per cent or S$0.01 to S$12.85; while DBS fell 0.03 per cent or S$0.01 to S$33.14; and UOB shed 1.6 per cent or S$0.44 to S$27.28.

Wall Street stocks finished decisively lower on Thursday (Oct 26) despite strong US economic data as markets digested mixed earnings and monitored the ongoing crisis in the Middle East. The Dow Jones Industrial Average finished down 0.8 per cent at 32,784.30. The broad-based S&P 500 shed 1.2 per cent to 4,137.23, while the tech-rich Nasdaq Composite Index dropped 1.8 per cent to 12,595.61.

SG

Agribusiness group Wilmar International reported a lower core net profit of US$323.6 million (S$443.62 million) for the 3QFY2023 ended Sept, a 59.4% decrease y-o-y from US$796.7 million in 3QFY2022. The group says this is mainly due to compressed refining margins from the tropical oils business, in line with industry wide trends, and a weaker performance from its fertiliser operations. Its net profit for the period came in at US$313.9 million. For the 9MFY2023, the group reported a core net profit of US$900.9 million, a 53.9% decrease y-o-y, while its net profit came in at US$864.8 million, 55.2% lower y-o-y. The group says that the 9MFY2022 results included a gain on dilution of interest in Adani Wilmar Limited amounting to US$175.6 million. The group says that its weaker results for this quarter were partially offset by its sugar milling and merchandising businesses, and improved crushing margins arising from tightness in availability of soybean in China. It says that its consumer products business improved in 3QFY2023 due to better margins and higher sales volume, while their joint ventures and associates also contributed favourably for the quarter. The group believes that results for the rest of the year will be satisfactory, as operating conditions were better in 3Q2023, and is anticipated to remain positive for the rest of the year.

Mapletree Pan Asia Commercial Trust (MPACT) has reported a distribution per unit (DPU) of 4.42 cents for the 1HFY2023/2024 ended Sept 30, 10.5% lower y-o-y. For the 2QFY2023/2024, MPACT reported a DPU of 2.24 cents, 8.2% lower y-o-y. However, its DPU rose q-o-q by 2.8%. The DPU will be paid on Dec 8. For the 1HFY2023/2024, MPACT reported gross revenue of S$477.3 million, up by 35.1% y-o-y. Property operating expenses during the six-month period increased by 47.4% y-o-y to S$1.15 billion. MPACT’s net property income (NPI) for the 1HFY2023/2024 increased by 31.7% y-o-y to S$362.4 million. The higher gross revenue and NPI for the quarter was on the back of better performance by its Singapore assets. Meanwhile, largely stable contributions from the overseas properties were weighed down by forex effects resulting from a stronger Singapore dollar. MPACT says that higher interest rates exerted pressure on the DPU, leading to year-on-year declines for the second quarter and the first half. As at Sept 30, MPACT’s portfolio committed occupancy came in at 96.3%, with increased commitments recorded in the majority of markets. MPACT’s two retail assets, VivoCity and Festival Walk, are close to full commitment. The tenant retention rate for the portfolio was 75.2%, and weighted average lease expiry (WALE) was 2.2 years for retail and 2.8 years for office/business park segments, resulting to an overall portfolio WALE of 2.5 years. During 1HFY2023/2024, MPACT renewed and re-let over 1.3 million square feet of lettable area, yielding a 3.2% portfolio rental uplift. Its core assets, VivoCity and Mapletree Business City, saw rental uplifts of 14.2% and 7.1%, respectively. As at Sept 30, the fixed rate debt of MPACT rose to 79.9%. Its aggregate leverage ratio stood at 40.7%, with an average term to maturity of three years.

Grocer group Sheng Siong on Thursday (Oct 26) posted a third-quarter net profit of S$34.8 million, up 5.7 per cent from the S$32.9 million posted the year before. Revenue in Q3 rose 3.7 per cent to S$345.8 million, from S$333.5 million last year. Sheng Siong said that sales contribution from its six new stores rose by 2.2 per cent, which is more than the 1.8 per cent growth logged in its other comparable stores. Earnings per share rose 5.9 per cent to 2.31 Singapore cents, up from 2.18 cents last year. The group expects challenging economic and geo-political conditions to linger. It also flagged climate risks from the onset of the El Nino weather pattern, which may threaten agriculture yields and drive up food prices amid smaller harvests and pricier animal feed. Margins may also suffer as a result of fierce pricing action among major grocers, and higher energy and staff costs, Sheng Siong added. However, the group expects a boost in sales from the support packages distributed by the government; it also notes that the higher GST rate and carbon taxes have created a growing preference for home-cooked meals.

Digital Core REIT reported a lower distributable income of US$31.5 million (S$43.21 million) for the 9MFY2023 ended September, 8.5% down from the US$34.4 million reported in the same period a year before. During the period, the REIT reported revenue of US$79.7 million, 1.2% lower y-o-y from US$80.7 million the year before. The REIT’s net property income (NPI) for the 9MFY2023 also fell by 3.7% y-o-y to US$51 million from US$53 million in the same period a year before. But this figure was a 2.2% increase from the REIT’s 9MFY2023 forecast of US$49.9 million. Profit for the period came in 33.9% lower y-o-y at US$22.1 million from US$33.4 million in the same period a year before. Likewise, net profit attributable to unitholders dropped by 38.9% y-o-y to US$17.4 million in 9MFY2023 from US$28.5 million in the same period a year before. As at Sept 30, Digital Core REIT reported a portfolio occupancy of 97%, based on net rentable square feet. The REIT notes that on June 4, its second-largest customer filed for bankruptcy protection. The REIT’s weighted average lease expiry (WALE) for the 9MFY2023 is 3.6 years as at Sept 30. For this period, the REIT has a 72% fixed rate debt, and its weighted average debt maturity is 3.2 years. It has a total of US$506 million of total outstanding debt, with a 34.4% aggregate leverage. Its average cost of debt stands at 5.1%, with a 3.3 times interest coverage ratio. Its net asset value (NAV) per unit stood at 80 US cents as at Sept 30.

Aesthetic medical-services provider Niks Professional’s initial public offering (IPO) was 5.9 times subscribed, with 21.8 million new shares in the company’s capital offered at S$0.23 per share. Of the 21.8 million, a million shares were available by public offer. Applicants applied for an aggregate of 5.9 million of these shares, which amounted to approximately S$1.35 million, the company announced on the Singapore bourse on Thursday (Oct 26). The remainder 20.8 million stocks were placement shares, of which 3.7 million was reserved for management, employees and directors. The placement shares were approximately 1.6 times subscribed. The company received indications of interest for about 32.9 million placement shares. This means that overall, the IPO was 1.8 times subscribed, taking into account interest for the public offer shares and indications of interest for the placement shares. The new shares will represent 16.8 per cent of the company’s enlarged share capital.

CapitaLand India Trust (CLINT) has reported a total property income of INR3.75 billion (S$61 million) for the 3QFY2023 ended Sept, 23% higher y-o-y. This y-o-y growth was due to the income contribution from ITPH Block A and ITPP-H. During this period, CLINT’s net property income (NPI) rose 22% y-o-y to INR2.87 billion or S$46.7 million. The higher NPI came due to the higher total property income but was partially offset by increase in total property expenses. For the 9MFY2023 or year-to-date (YTD), total property income rose 20% y-o-y to INR10.4 billion, due to higher occupancy and income contribution from ITPH Block A and ITPP-H which were completed and acquired in Jan and May 2023 respectively. 9MFY2023 NPI rose by 16% to INR8.14 billion, due to the higher total property income, partially offset by increase in total property expenses. As at Sept 30, CLINT’s portfolio occupancy stood at 92%, with a weighted average lease expiry (WALE) of 3.5 years. For this period, CLINT’s fixed rate debt is at 71%, and has a gearing ratio of 37%. Its interest service coverage stood at 2.6 times.

EC World Real Estate Investment Trust (Reit) has failed to sell two logistics assets in Zhejiang, China, as the Reit sponsor could not obtain sufficient financing for the proposed divestment. This rendered the sponsor Forchn Holdings and the purchasers unable to complete the deal by the already postponed long-stop date on Oct 31, the manager announced on Thursday (Oct 26). The manager said it is looking for at least two independent consultants to evaluate the possibility of divesting one or more of the Reit’s properties to third parties via open market sale. This includes, but is not limited to, Bei Gang Logistics and Chongxian Port Logistics. The troubled Reit is also seeking legal and financial advice on the possible termination of the proposed divestment and options to address “ongoing challenges”. EC World Reit had on Sep 30 last year entered into an equity purchase agreement to divest all of its indirect interests in the two logistics assets in Zhejiang. The long-stop date was extended to Oct 31 from the initial Jan 31 this year, after the Reit received approval from the Monetary Authority of Singapore.

US

Amazon reported third-quarter earnings and revenue on Thursday that sailed past estimates. Earnings per share was 94 cents vs. 58 cents expected while revenue came in at US$143.1 billion vs. US$141.4 billion expected. In terms of the segment numbers, Amazon Web Services generated US$23.1 billion vs. US$23.2 billion in expected revenue and Advertising generated US$12.1 billion vs. US$11.6 billion in expected revenue. Amazon said fourth-quarter sales, which include the key holiday period, will be between US$160 billion and US$167 billion. Analysts were expecting revenue of US$166.6 billion. At the mid-point of its guidance range, revenue of US$163.5 billion would represent growth of 9.6% from US$149.2 billion a year earlier. Revenue jumped 13% in the third quarter, a sign that the business is seeing some acceleration after a difficult 2022 that was marred by soaring inflation and rising interest rates. Sales in Amazon’s core e-commerce business continued to recover, expanding 7% year over year, after growing 4% in the previous quarter. The September quarter includes the results of this year’s Prime Day promotion, which took place in July. Digital advertising continues to be a bright spot for Amazon, as third-party sellers and large brands bolster their ad spending to improve visibility in an increasingly competitive marketplace. Ad revenue soared 26% from a year earlier. In cloud, however, Amazon appears to be giving up some market share. Amazon Web Services, which leads Microsoft Azure and Google Cloud, showed growth in the quarter of 12%. Microsoft earlier this week said Azure revenue jumped 29%, and Google Cloud expanded by 22%.

The US economy grew at its fastest pace in nearly two years during the past three months, the Bureau of Economic Analysis’s advance estimate of third quarter US gross domestic product (GDP) showed the economy grew at an annualized pace of 4.9% during the period, faster than consensus forecasts. Economists surveyed estimated the US economy grew at an annualized pace of 4.5% during the period. The reading came in higher than second quarter GDP, which was revised down to 2.1%. The GDP release highlights the resilience of the US consumer despite ongoing concerns of a slowdown. But many economists see this as the high water mark for economic growth before the credit tightening induced by the Federal Reserve’s interest rate hikes and the recent rise in bond yields grabs hold of business development and consumer spending.

Intel reported third-quarter earnings on Thursday that beat expectations for profit and sales, even as overall revenue declined. Earnings per share was 41 cents, adjusted, versus 22 cents expected while revenue came in at US$14.16 billion, versus US$13.53 billion expected. For the fourth quarter, Intel expects earnings of 23 cents per share, adjusted, on revenue of US$14.6 billion and US$15.6 billion, versus expectations of 32 cents per share on US$14.31 billion in sales. Intel posted GAAP net income of US$297 million, or 7 cents per share, versus net income of US$1.02 billion, or 25 cents per share in the same quarter last year. Intel’s gross margin for the quarter was 45.8%, which is flat year-over-year. Revenue fell 8% from US$15.33 billion a year ago, the seventh consecutive quarter of declining sales. However, it told investors on Thursday that it expects revenue to grow again in the current quarter. Intel CEO Pat Gelsinger told analysts on a call the company would cut costs by about US$3 billion this year. CFO David Zinsner said that Intel’s earnings per share this quarter benefited from the company controlling expenses, with operating expenses declining 15% from a year ago. Intel said it has 120,300 employees, down from 131,500 last year.

Ford Motor on Thursday missed Wall Street’s third-quarter earnings expectations, as it restructures its operations and regroups following the end of a nearly six-week U.S. labor strike that in total has cost the company US$1.3 billion. Due to the work stoppage by the United Auto Workers union, which ended Wednesday with a tentative deal, the company pulled its previously announced earnings guidance that included adjusted earnings between US$11 billion and US$12 billion and adjusted free cash flow of US$6.5 billion to US$7 billion. Prior to the strikes, which began Sept. 15, the company was “poised” to hit its earnings guidance, Chief Financial Officer John Lawler said. For the third-quarter, adjusted earnings per share was 39 cents vs. 45 cents expected and Automotive revenue was US$41.18 billion vs. US$41.22 billion expected. Lawler blamed the misses on the UAW strike as well as cost and quality issues, which have plagued the automaker’s operations in recent years. Lawler said the UAW deal, if ratified by members, is going to add US$850 to US$900 per vehicle assembled. He said Ford will work to “find productivity and efficiencies and cost reductions throughout the company” to offset the additional costs and deliver on previously announced profitability targets.

United Parcel Service reported a bigger than expected revenue decline and cut its revenue guidance for the year. Adjusted earnings was US$1.57 vs. US$1.52 per share expected while revenue came in at US$21.06 billion vs. US$21.46 billion expected. For the three-month period ended Sept. 30, UPS reported earnings of US$1.13 billion, or US$1.31 a share, compared with US$2.58 billion, or US$2.96 a share, a year earlier. The company also lowered its revenue outlook for the full year. UPS now expects this year’s consolidated revenue to be between US$91.3 billion and US$92.3 billion, down from its previous projection of US$93 billion. The delivery giant cited global economic uncertainty as the main factor in lowering its outlook. It didn’t directly mention any financial impacts from negotiations with Teamsters in August in efforts to avoid a labor strike.

US defense company Northrop Grumman on Thursday raised its annual revenue target for the second time this year after its third-quarter earnings beat analysts’ estimates helped by strong weapons demand. The tense geopolitical landscape has created a strong global appetite for U.S. weaponry, with nations actively engaged in negotiations and striking deals to acquire arms and looking to speed up ongoing contracts. Increased defense spending by the US and its allies benefited Northrop’s topline. Northrop’s award volume in the reported quarter was US$15 billion and the book-to-bill ratio, a comparison of orders received to units shipped and billed, was 1.53 to 1. Sales in the company’s Defense Systems segment rose 6%, helped by high demand for its ammunition and rocket motors used in guided multiple-launch rocket systems, which played a crucial role in supporting Ukraine’s defense efforts against Russian forces. Ramp up of development programs, primarily the Ground-Based Strategic Deterrent (GBSD), which aims to replace the aging ICBM system and its nuclear cruise missiles boosted sales at Northrop’s Space Systems division by 11% to US$3.51 billion. The company’s aeronautic systems business, which houses the high-profile B21 Raider jet program, posted a 9% rise in sales. Northrop now expects 2023 revenue to be US$39 billion, from its earlier projected range between US$38.4 billion and US$38.8 billion. Overall profit in the third quarter was US$937 million, or US$6.18 per diluted share, compared with US$915 million, or US$5.89 per diluted share, a year earlier. Analysts were expecting a profit of US$5.81 per share. Quarterly sales jumped 9% to US$9.78 billion, ahead of estimates of US$9.58 billion.

Merck & Co on Thursday reported higher than expected results in the third quarter on surprisingly strong demand for its COVID-19 treatment, primarily in Japan, and raised its annual sales forecast for the therapy. Sales of molnupiravir, the COVID-19 antiviral pill sold under brand name Lagevrio, jumped 47% to US$640 million in the quarter, crushing Wall Street estimates of US$120 million. Merck raised Lagevrio full-year sales forecast to US$1.3 billion. Third-quarter sales of Merck’s top-selling cancer immunotherapy, Keytruda, stood at US$6.34 billion, surpassing analysts’ average estimate of US$6.22 billion. Gardasil, its vaccine to prevent cancers caused by human papillomavirus (HPV), generated sales of US$2.59 billion, rising 13% but missing analysts’ average estimate of US$2.69 billion. The company now expects 2023 sales in the range of US$59.7 billion to US$60.2 billion, up from its previous forecast of US$58.6 billion to US$59.6 billion. The company posted sales of US$15.96 billion in the reported quarter, compared to the average analyst estimate of US$15.3 billion. The US drugmaker earned an adjusted profit of US$2.13 per share, beating estimates of US$1.95 per share.

Southwest Airlines said Thursday it plans to slow its capacity growth next year, citing moderating travel demand as booking patterns shift back to pre-pandemic norms. Southwest will expand its flying between 10% and 12% in the first quarter of 2024 from a year earlier, down from a previous forecast of as much as 16% growth, Southwest said in an earnings release. It expects to grow between 6% and 8% for the full year 2024, it said. For the third quarter, adjusted earnings per share was 38 cents matching consensus while total revenue came in at US$6.53 billion vs. an expected US$6.57 billion. Southwest forecast unit revenue, the amount an airline brings in for each seat it flies a mile, would drop between 9% and 11% from a year earlier in the fourth quarter, with capacity up about 21%. Southwest’s net income in the third quarter dropped 30% from a year earlier to US$193 million, or 31 cents per share, while revenue advanced 4.9% to US$6.53 billion.

Source: SGX Masnet, Bloomberg, Channel NewsAsia, Reuters, CNBC, WSJ, The Business Times, PSR

RESEARCH REPORTS

Frasers Centrepoint Trust – High portfolio occupancy with stable valuations

Recommendation: Accumulate (Maintained), Last Done: S$2.05

Target price: S$2.29, Analyst: Darren Chan

– 2H23/FY23 DPU of 6.02/12.15 Singapore cents was 1.2%/0.6% lower YoY, but in line with our expectations and formed 49%/100% of our FY23e forecast. Retail portfolio occupancy increased 2.2ppts YoY to 99.7% (3Q23: 98.7%).

– FY23 tenants’ sales and shopper traffic improved 7.3% and 24.7% YoY respectively. YTD tenants’ sales averaged c.17% above pre-COVID levels. Retail portfolio valuation rose 0.6% YoY to S$8.74bn with unchanged cap rates.

– Maintain ACCUMULATE, DDM TP lowered from S$2.35 to S$2.29 as we roll forward our forecasts. We have reduced both FY24e and FY25e DPU forecasts by 5% after accounting for the divestments of Changi City Point and FCT’s stake in Hektar REIT. We expect positive rental reversions to remain intact for FY24e, supported by the low occupancy cost of 15.6% and tenants’ sales growth. The current share price implies a FY24e DPU yield of 5.9%.

Alphabet Inc. – Advertising rebound, but Cloud lags

Recommendation : BUY (Maintained); TP: US$144.00, Last Close: US$125.61

Analyst: Jonathan Woo

– 3Q23 results were within expectations. 9M23 revenue/PATMI were at 72%/71% of our FY23e forecasts. PATMI grew 42% YoY on higher operating leverage.

– Ad revenue rebounded for a 3rd straight quarter as retail advertisers began preparing for the holiday season. Ad revenue growth tripled sequentially to 9% YoY.

– Cloud was a disappointment, with revenue growth decelerating to 22% YoY due to moderating client spend, losing ground on competitor Microsoft’s Azure (29% YoY).

– We maintain BUY with an unchanged DCF target price of US$144, with a WACC of 7.3% and a terminal growth rate of 3.5%.

Microsoft Corp – Azure growth re-accelerates

Recommendation: ACCUMULATE (Maintained); TP: US$375.00

Analyst: Ambrish Shah

– 1Q24 revenue/PATMI was in line with expectation at 24%/26% of our FY24e forecasts. Total revenue grew 13% YoY as Azure growth re-accelerated to 29% YoY. PATMI rose by 27% YoY due to higher operating leverage.

– For 2Q24e, Microsoft expects total revenue to grow 15% YoY to US$60.9bn driven by corporate cloud-computing demand and increase in gaming revenue. Management reiterated its expectation of flat operating margins for FY24e (~42%) despite absorbing Activision Blizzard. Office 365 Copilot AI tools (US$30 per user per month) to commercially launch on Nov. 1.

– We maintain ACCUMULATE recommendation and nudge our DCF target price to US$375.00 (prev. US$372.00) using a WACC of 7.2% and terminal growth rate of 4%. Our FY24e revenue/PATMI is increased by 2%/0.4% to account for Activision acquisition and continuation of AI tailwinds. Microsoft is well-positioned to benefit from shifting workloads to the cloud, demand for its AI-enabled products, and cybersecurity upgrades.

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